What Is a Cash Advance? [Ultimate Guide]

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What is a cash advance? This article addresses what a cash advance is, how it works—including terms and fees—and how to get one. We also consider if a cash advance reflects your credit score and some alternatives that could save you money.

What Is a Cash Advance?

A cash advance is a short-term cash loan obtained from a bank or lender with high-interest rates and substantial fees. It can also involve withdrawing cash from a credit card offered by a card issuer to cardholders.

Disregarding the high costs of this particular type of loan, borrowers often find it convenient when in need of immediate cash due to its fast approval and funding.

Types of Cash Advance

Depending on who provides a cash advance and under what conditions, there are a few types of this loan, which all have one thing in common: they’re expensive.

  • Credit Card

What is a cash advance on a credit card? Instead of making purchases, you can withdraw money from your credit card for other purposes. But you must be careful because different balances apply on a cash advance than on credit card purchases.

After taking a cash advance, if you make just the minimum monthly payment on your credit card, the card issuer will use it to cover the balance with a lower interest rate. If you continue with this payment rate, you could end up with high accruing interest for months.

  • Merchant 

What is a merchant cash advance? Certain companies with lower credit scores often opt for cash advances from banks or alternative lenders. This type of short-term cash loan provides companies with necessary funds usually paid back through the percentage of future credit card or online sales. The agreed rate is typically taken from companies daily or weekly until they pay the total amount borrowed, plus interests and fees.

Although it costs more, lenders focus less on the business’s credit score and more on its creditworthiness, so it’s suitable for businesses with less-than-great credit scores.

  • Payday Loans

These cash advance loans come with extremely high fees and rates, with short terms of repayment. They usually range from $50.00 to $1,000, with a fee of around 15% of the borrowed amount and with interests that often exceed 100%.

A credit score is not an essential criterion for payday loans. The amount approved primarily depends on local regulations and the paycheck of the applicant. An applicant typically must provide personal identification information and proof of income.

This option usually carries the highest cash advance rates. When approved, the borrower issues a postdated check or signs an electronic agreement that allows an automatic payment from their bank account to the lender. The loan must be paid back on the next payday unless the borrower decides to extend it, in which case there is additional interest.

Some employers provide payday loans for their employees with different terms and often don’t charge fees or interest.

How Do Cash Advances Work?

Although more expensive than other loans, cash advances are easy to withdraw, providing prompt funding. There are a few ways to get a cash advance.

  • A Bank: You can go to a bank and ask for a cash advance with your credit card.
  • Convenience Check: If your credit card comes with convenience checks, you can write one for yourself and cash or deposit it.
  • ATM: One of the ways how to get cash advances on credit cards is to make a cash advance withdrawal at an ATM via a credit card. If you don’t have a PIN, you can ask for one from your card issuer, but this can take a few business days. There are limitations with the amount of money you can withdraw at an ATM.

Cash Advance Considerations

First, what is a cash advance fee? This is typically a set amount or percentage that most credit card issuers ask you to pay using the cash advance option. Depending on the way you choose to take a cash advance, you might encounter different fees.

  • A cash advance APR is higher than the annual percentage rate applied on purchases you make with your credit card.
  • A bank or ATM fee is different from a cash advance fee, which you will likely need to pay, depending on where you make your withdrawal.
  • Even though the cash advance definition implies that you can borrow against a credit limit, a cash advance limit is typically under $200.00. But you should be aware that this is a simple, short-term solution.
  • Interest rates—except for being higher than rates set for regular credit card purchases—start accruing from the day of your cash advance withdrawal. This means there is no grace period for a cash advance. And cash advances usually don’t qualify for initial low-interest (or no-interest) offers from card issuers.

Cash Advance Costs

How does a cash advance work on a credit card, and how much does it cost? A cash advance fee can be initially set, or it can depend on the amount of money you borrow—it’s typically between 3 and 5%. For example, if you take $500.00 with a cash advance fee of 3%, you would pay a $15.00 fee. Sometimes the fee can either have a set minimum dollar amount or a set percentage. In this case, you would then be charged the higher amount of the two.

An ATM or bank fee will also be charged, depending on the option you choose when getting a cash advance and on the company that owns the ATM.

What is cash advance APR, and how does it differ from your credit card’s usual annual percentage rate? A cash advance is treated differently from regular credit card purchases; it has no grace period and higher interest rates. For example, if you take $500.00 with a 24% APR, you will pay about $10.00 in interest if you pay back the loan in 30 days. Compared to the average APR for purchases, you pay around 24%, approximately a 9% higher interest.

When to Use a Cash Advance

If you need swift funding, and you don’t mind paying higher rates for the convenience of getting money quickly, then a cash advance might be an acceptable loan for you. But it’s not a good idea to use it, trying to make ends meet frequently.

Although cash advance loans can be suitable for cases of emergencies, they could be a bad option if you’re not well-prepared. Always make a solid plan to pay the advance back as soon as possible, thereby avoiding paying more interest than necessary.

Alternatives to Cash Advances 

Before heading to the bank or an ATM, consider the following alternatives:

  • Borrow Money From Friends or Family

Although it’s not the most comfortable situation, anyone can be a bit stretched with a budget. Consider speaking with those you’re close to and explain your alternatives.

  • Take Out a Personal Loan

A personal loan is a longer-term option, which might be good to consider when you know that a single cash advance won’t significantly improve your financial situation. Although a personal loan comes with its own set of costs, they are usually lower than a cash advance.

Do Cash Advances Affect Credit Scores?

Do cash advances hurt your credit? Even though such advances don’t directly impact your credit score, they may negatively affect it in several ways.

Withdrawing a certain amount of money from your credit card causes your credit utilization ratio to grow. This can affect your credit report because the credit utilization ratio is one of the criteria for determining a credit score—keeping it low is a smart thing to do. High-interest rates may also cause you not to meet your minimum payments, affecting your credit score.

Conclusion

A good decision requires being well-informed. What is a cash advance? What are its terms and fees? This article has set out to answer these questions with solutions that fit your needs. Fees, high-interest rates, and a cash advance limit (with no grace period) make this loan a costly short-term solution. But it could still be a good option for swift funding that is simple to obtain.

FAQ

How does a cash advance work?

A cash advance allows you to borrow against a credit limit and withdraw money from your credit card. But it often comes with a set of fees and high-interest rates that you’ll need to repay in the short term.

Is a cash advance bad for your credit?

If taking a cash advance increases your credit utilization ratio, it may reflect poorly on your credit score. Try to keep your ratio under 30% and your repayments regular. Beware, however, that using a cash advance may often raise a red flag with future lenders.

What is considered a cash advance on a credit card?

Other than withdrawing cash, card issuers may define other transactions as cash advances, carefully reading the terms and conditions. For example, cash advance interest and fees may also apply on overdraft protection, gambling transactions, purchases of gifts and prepaid cards, foreign currency, and traveler’s checks.

How do you avoid cash advance interest?

A cash advance typically doesn’t include a grace period—so there’s no way to avoid paying interest rates. To avoid unpleasant surprises, it’s essential to understand the answers to the question: what is a cash advance?

What do I need for a cash advance?

To get a cash advance on your credit card, you need to have enough credit limit for you to make a withdrawal—remember that you’re borrowing money against your card’s line of credit. If you want to take a cash advance via ATM, you need a credit card with a PIN.

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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